|BNY Mellon's Simon Derrick on BloombergTV|
- In 2-3 months time, there is a "very real prospect" that there won't be a Greek bailout in place, and Greece won't get the next tranche of cash from the IMF and EU.
- "If there is technical default on Greece, there is a very good chance the ratings agencies will move Ireland and Portugal into junk territory (Moody's has Ireland at Ba1 -junk and Portugal at Ba2 -junk), which means investors can't hold that debt and that also causes issues further down the line."
- Uncertainty drives investors out of Euros and risk assets, "and back into the funding currencies, the US Dollar and the Yen, and also into the ultimate safe haven currency which is the Swiss Franc."
- "If there were a quick resolution for Greece, I feel fairly certain that there'd be a reasonable rally for the Euro."
He's betting on a trend breakdown
- Important secondary issue related to China and the end of QE2: "Over the course of the last 12 months, one of the main forces driving the Euro higher, despite the Euro crisis, has been the recycling of reserves by countries like China. The stronger the reserves flow into those countries, the stronger the diversification at the margins, the higher the Euro's got. At the moment there is a concern that maybe China is going to have a slowdown during the second half of this year. And particularly coming at the same time that QE2's dissipating in the United States, there is a belief that less money will be flowing into those markets." (which means less recycling into Euros, or support for the Euro)
- Outlook for EUR/USD at year end: "We've been actually bearish for quite a while now. Our belief really from about February of this year was that this summer would see a turning point for the Euro, and that we would see a more risk averse, more soft patch for growth taking place in the second half of the year. So we've pretty well been bearish; the only question is do we need to revise down our targets even further from where they currently are. My belief we'll probably end up with targets in the low 1.30s for Euro/Dollar by year end."
Source: BloombergTV http://www.bloomberg.com/video/72342294/